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The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution


  • Woon Gyu Choi

    (International Monetary Fund)


This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold. Copyright 2002, International Monetary Fund

Suggested Citation

  • Woon Gyu Choi, 2002. "The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-4.
  • Handle: RePEc:pal:imfstp:v:49:y:2002:i:2:p:4

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    References listed on IDEAS

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    Cited by:

    1. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor rules in a structural VAR," Working Papers 2010-005, Federal Reserve Bank of St. Louis.
    2. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Staff Working Papers 07-1, Bank of Canada.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects


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